Thanks OA.
I think this post misses several important points.
- Liquidity is a tool for achieving our goals, not the goal itself. The actual goal is to grow AUM which is achieved through unit supply growth.
- The impact of V3 on liquidity mining. In my mind, V3 is a paradigm shift for LM and it doesn’t make sense to me that it wouldn’t be a major component of any liquidity mining strategy.
So, let me dig into these two points as I see them overlapping quite a bit.
Liquidity = user experience
As you said, our customers want to buy our products with low slippage at different trade sizes and LPs want clarity and to be properly rewarded for the service they provide.
With Uni v3, we no longer need to pay for liquidity itself. If we assume that DPI-ETH pool is even 5x more efficient on V3, then we only need a $10m pool. If the pool is $10m, supporting between $5 and $10m in daily trading volume, that swap fee APY is going to be very attractive and drive more LPs into the pool. So, we will get a much better outcome in terms of customer experience (the pool will be deeper) and we won’t need to spend anything to incentivise liquidity. With Uni V3, deep liquidity is no longer a competitive advantage.
So we should be giving notice to LPs that we will be turning off LM incentives for DPI in 2 months time (or whatever notice we want to give) and shifting the pool to V3. It frankly baffles me that we have a liquidity mining strategy that doesn’t consider this.
So if we no longer have to incentivise liquidity we can turn our attention to what we actually want to be incentivising. Which is unit supply growth. Looking at DPI, for example, we recently cut incentives. What did it do to unit supply growth? Well, nothing really, unit supply growth actually went up. We are hitting all-time highs for DPI unit supply. Again, liquidity is a tool for achieving our goals, not the goal itself.
Couple other comments but basically all of them revolve around the fact that Uni V3 allows us to significantly de-prioritise liquidity.
This is problematic because most of the criteria are subjective.
We shouldn’t be targeting liquidity, as explained above. The situation is somewhat different for new products that we need to bootstrap. This was discussed in the post looking at liquidity mining through the lens of a product life cycle. Essentially, it makes sense to have a 90-120 day LM program to bootstrap initial liquidity and adoption.
These are the experiments we should run. What is the impact of increased LM incentives on unit supply? Is there a strong correlation? If LM incentives really drive unit supply growth, how sticky is that supply?
To sum up, I think we are having a wrong conversation here. This approach to liquidity mining doesn’t take into consideration the most important development in LM to date - Uni V3. Uni V3 allows us to focus on unit supply growth and shifting funds to directly incentivising unit supply instead of liquidity. For new products, incentives could be a good tool to bootstrap the product, but should run for a limited amount of time.